The U.S. Department of Justice said Friday night that a legal settlement Google Inc. (GOOG) struck with authors and publishers to make millions of books available online should be rejected in its current form, but it encouraged the parties to revise the agreement to address several government concerns.

"Because a properly structured settlement agreement in this case offers the potential for important societal benefits, the United States does not want the opportunity or momentum to be lost," the department said in a 32-page legal brief.

The department's brief is the strongest sign yet that changes to the controversial settlement are likely. Government lawyers said in the court document that the parties are considering modifications to the deal to address concerns raised by the department and other critics.

Google reached the settlement last year, agreeing to pay $125 million to establish a registry to allow authors and publishers to register their works and get paid when their titles are viewed online. The deal resolved a consolidated lawsuit in which authors and publishers sought to block the company from scanning books and making them searchable online. The plaintiffs alleged that Google's book search project violated copyrights.

The department said Friday the current settlement raised antitrust, copyright and class-action law concerns.

Among its recommendations, the department said the parties should limit broad settlement provisions on future licensing that would allow Google to offer new products derived from its digital books platform.

Highlighting a number of antitrust concerns, the department said the current settlement could preclude other digital distributors from competing with Google and could allow book publishers to restrict price competition.

The department also questioned whether the settlement could impose certain copyright policy changes, and it said the agreement needed better protections for unknown copyright holders and foreign authors and publishers.

Despite the concerns, the department said the settlement "has the potential to breathe life into millions of works that are now effectively off limits to the public."

Google, the Authors Guild and the Association of American Publishers said in a joint statement that the department's legal filing recognized the value of the settlement.

"We are considering the points raised by the department and look forward to addressing them as the court proceedings continue," the parties said.

A Google spokesman declined to comment on whether the parties were considering making changes.

A Justice Department official, speaking on the condition of anonymity, said it was "too early to tell" whether the types of changes the government recommended would require the parties to again notify all members of the plaintiff class about the terms of the settlement.

The parties have previously voiced concerns about the time and cost of doing that again.

The department's comments came in a brief filed with a federal trial judge in New York who must decide whether to approve the settlement. U.S. District Court Judge Denny Chin has scheduled a hearing for Oct. 7 to consider the matter.

Supporters and critics of the settlement have flooded Chin with comments on the pending agreement.

Critics, including Microsoft Corp. (MSFT) and Amazon.com Inc. (AMZN) say the settlement gives Google a new monopoly to exploit copyrighted books and could make it difficult for rivals to compete in the market for digital titles.

Google and its supporters say the deal is a landmark agreement that will give the reading public unprecedented access to digital books and open up a new stream of revenue for authors and publishers.

-By Brent Kendall, Dow Jones Newswires; 202-862-9222; brent.kendall@dowjones.com